Housing market moves toward gains
HACKENSACK, N.J. – The housing market – staggering under a slow economy and still paying for the excesses of the boom years – may start to stir to life in 2012.
But experts warn that a real rebound is still several years away.
“Our outlook is that things (in 2012) will be a little bit better than 2011,” said Patrick Newport, an economist with IHS Global Insight. “But that’s not saying much.”
Blame the economy, with unemployment topping 8 percent. If economic and job growth pick up in 2012, housing is likely to get a boost. But that’s a big “if.” IHS expects the U.S. economy to grow at an anemic 1.6 percent – or possibly even tip into recession as a result of Europe’s debt problems.
“Our view is that the economy isn’t going to grow fast enough to bring down the unemployment rate,” said Newport. “That’s one of the reasons that it will take the housing market another 1 ½ to two years to get back on track and start growing again.”
“People are not going to come out and make the most expensive purchase of their lives if there’s any uncertainty about their jobs,” said Robert Denk, an economist with the National Association of Home Builders, who predicts that home construction won’t return to normal levels until 2015.
And the housing market is still suffering a hangover from the wild times of 2004 and 2005, when questionable mortgage practices inflated prices to unsustainable levels, and allowed unqualified buyers to get into homes they couldn’t afford.
Here’s a closer look at what to expect in 2012:
Prices: Newport expects prices nationwide to slide another 5 or 10 percent in 2012, as the foreclosure pipeline gets moving again, dumping distressed properties on the market. Foreclosed properties tend to sell at a discount of 20 to 30 percent, according to several studies.
Lower prices have left many homeowners (especially those who paid high prices at the market peak) owing more on their homes than the properties are worth.
Of course, the lower prices have also made it easier for buyers to afford homes. And once the foreclosure bottleneck is cleared, many low-priced properties will come onto the market, said Patrick O’Keefe, an economist with J.H. Cohn in Roseland, N.J.
“There will be a lot of opportunities for purchasers to get steeply discounted properties,” he said. He predicted prices will stabilize by the end of 2012.
Many buyers have held back because they think that home prices will keep dropping.
“Most people don’t want to buy in a market where prices are falling, because you lose your equity right off the bat,” Newport said.
Interest rates: Mortgage rates, which have been near record lows for several years, will remain below 5 percent, according to most forecasts. Along with lower home prices, the rock-bottom rates have made buying a home much more affordable. But many potential buyers find they can’t qualify for the lowest rates unless their credit is flawless.
Construction: The multifamily market – especially for rentals – is the only area where construction has started to pick up again.
As the homeownership rate has dropped from a record 69.2 percent in 2004 to 66.3 percent in the third quarter of 2011, millions of people have turned to renting.
For the most part, new home construction has been bumping along at the lowest levels since World War II.
“We’re expecting some recovery in 2012, and a little more momentum in 2013,” Denk said.
Even so, in 2012, builders are expected to construct only about 40 percent of what’s needed just to keep up with population growth, which Denk said is about 1.2 million units a year. In 2013, home construction will come to only 60 percent of normal levels, he predicted.
David Stiff, an economist with Fiserv, said builders are reluctant to move forward with new projects because they would have to compete with low-priced foreclosures. And banks will remain reluctant to lend to builders “until they’re sure the housing market has started to stabilize,” he said.
When will buyers return? During the 2007-09 recession, about 2 million fewer new households than expected were created, according to Denk, the economist with the National Association of Home Builders. And household formation has continued to be depressed since the recession ended, Denk said.
After losing their jobs (or their homes to foreclosure), millions of people doubled up with friends or relatives. At the same time, young adults stayed in their parents’ homes longer while they searched for good jobs.
But sooner or later, most of these people will create their own households, ratcheting up demand for apartments and homes.
“Kids can choose to stay in their parents’ houses longer, or young adults can live with roommates longer, but at some point, something’s got to give,” Denk said. “To be in your 30s or 40s and still living in your parents’ basement, that’s just not going to work.”
With the U.S. population growing by about 3 million a year, the housing market needs about 1.5 million new homes a year, Newport said. But he expects that builders won’t ramp up to that level until mid-2013 or 2014.
“Ultimately, demographics will bring the housing market back to life,” Newport said. “The question is when is that going to happen?”